Value accrual: innovation at the intersection of tokenomics and governance - Ivan | Aragon

Hi everyone, I'm Ivan. I'm a part of Aragon and I'm going to talk about governance and tokconomics and what's happening at the intersection of it and you know why do we have tokens and what can we do with them um so what's Aragon we've been building governance since 2014 our code base is securing over 40 billion on chain um you know lido curve are like some of the biggest users of that infrastructure uh since way back when um we are the only integrated solutions provider that does like contracts, back end, UI for governance. Um, and over the past 18 months, we've done a lot of token centric like tokconomics, incentive alignment that goes just beyond governance. Um, so every DAO has a token at some point. Um, a lot of Dows get launched because there is a token.

So, so just briefly tokens and why we why why we've issued them and you know what's what's coming next. So 2013 everybody was like forking Bitcoin changing a few parameters and it was like money was the use case like the token was going to be money that's why we we launched I don't know thousands of tokens Litecoin is like one of those that is still kind of around Dodgecoin as well uh like both iterations of Bitcoin. Then 2017, we had like the token is going to be like utility and the main one of the main things that stuck as utility was method of payment. I'm going to I'm going to set up a lemon stand and you're going to be bringing in dodgecoin or lemoncoin. Um it was a very funny.

Um and uh that didn't really work out. uh the concept didn't make a lot s a lot of sense but also like technology adoption wasn't there 2019 roll uh 2019 rolls around like the idea of governance tokens gets anchored um a lot of projects started forking compound um it was like one of the earlier air drops at the time it was called liquidity mining um And as with a lot of pe a lot of things, you know, when there's something is successful, people just like blindly fork it. They don't think about iterations too much. So, so we've been dealing with that sort of use case for tokens for quite a while. 2024, the meme coins thing exploded.

And one of the interesting implications there was people actually realized a lot of governance tokens are in essence a memecoin, right? because because you you actually don't have any value acral. You don't have any actual control over the protocol or its capital flows on chain. Um which makes it a meme cocoin with extra steps. Um and like people were kind of despared by this.

Um I I'm actually pumped because I'm like okay like this is a very clear uh sort of like stage gate that is going to push some teams to do better and others would just like keep doing the meme coins. Um another Ivan from Gearbox, he had like a very cool blog post about like the sort of the fork in the industry where like there are teams that are building something like actually meaningful and people and and teams that are just like we're going to launch a coin and see what happens. Uh so I'm excited about the future of tokens. Um so with that in mind like capital formation will remain the core of why we mean tokens. Uh that's not a bad thing.

I think tokens are a very flexible way to align incentives across stakeholders for emerging technology and product companies. Um but like what happens afterwards, right? like this is this is going to be why people will launch the tokens that how are you going to like leverage that beyond the initial distribution. So one of the problems with most governance tokens today people get people are go are given decision-m power sometimes real sometimes not the problem is you know everybody's kind of pulling in their own direction because there isn't a like a single shelling point for everyone to align with around right so it's like um it's it's a very common problem in in traditional corporate governance like minority investor protection like the principal agent problem where you give someone decision-making power and they have no skin in the game and then they just like pull towards like oh like you know I'm I'm I'm contributing to this DA I'm not getting paid I don't have any tokens but I'm going to land a service contract and like that's how I'm going to get my money um clearly incentives kind of suck uh so so why do we do toconomics um Charlie Mer had a very famous quote which is why I had the Burkshire Haway reference earlier show me the incentives and I'll show you the outcome. So in essence, you know, people would very rarely go against their financial incentives and that means that we need to figure out ways to align those incentives and the token is if well designed the perfect vehicle to do so.

I don't have a timer. I don't know, maybe I'm going a bit too fast, but this will give us time for Q&A. Um so there are like sort of like two symbiotic objectives for tokens. On one side you want to align incentives. Uh you have different stakeholders.

You have like developers, you have finance years, whether those are like people that invested in your seed round or those are people that are going to like inject liquidity into the protocol. Um there are different like user categories. So you want sort of all of them to have skin in the game in the network that you're building. Um and on the other side you have you you want to like build capture resistant networks. The the challenge is over the past few years we focused so much on building capture resistant networks.

Um the thing though is uh if if you if you if you don't build anything valuable, nobody's going to come and try to capture it, right? The reality of it is capture resistance matters at scale, right? like like if if you have I don't know if if you're managing $5,000 probably an Excel table would suffice because you have enough social layer cohesion between the the members that like you're not going to rug your friends for like a few thousand. If it's a few billion things start to look very differently and then that's when capture resistance really matters. And you know like before we f we we hyperfixate on the on the capture resistance element we need to like make sure that there is enough alignment in an ecosystem so that you actually build something worth capturing and worth defending.

So tokens should be ownership. Um a few months ago there was this meme of founder mode. Um, and and the thing is like if you don't give people skin in the game, you end up with like sort of a loose community of of of like Discord members that are sort of like contributors. You you don't you don't need a loose community. You need fanatics like like a small community of fanatics would outperform a massive community of like people that sort of don't care.

And what does ownership mean? Ownership h in my definition it has two key components. It's control over outcomes which is the you know direct onchain implications of decision-m power whether you have control over code or capital. You do have like like control over the outcome. And then the second crucial element is you have to have skin in the game or you have to be able to benefit from the success of the shared endeavor.

So this is not a silver silver bullet. I'm going to talk about VE because it's it's the the best established model for incentive alignment that we have today. uh you know it was pioneered by curve uh and we we we had a chat with uh Michael a few months back and this is a direct quote like it's not it's it's good at aligning incentives but that doesn't solve your problem if you're not having like a solid fundamental business underneath. Uh and thankfully a lot more protocols and product teams in the industry are starting to think of like okay like I'm I'm building a business. Yes, maybe there is a public goods aspect to it but ultimately anything that needs to be sustainable and uh that hopefully aspires for longevity requires financial sustainability.

So you need to create value and you need to capture and acrew some of it to the people that create it so they keep contributing. So at a very simple scale um how you can help acrew value into a token and align incentives through a VE system. Um you have I don't have a pointer. Do I have a pointer? I have a pointer.

Okay, cool. So uh such a system usually has like a staker contract where you can park the native liquidity tok the native token. Uh it's useful because it helps you manage the liquidity of how much tokens are out in circulation. Uh it also allows you to introduce a time multiplier that basically gives more decision-m power to teams to teams to uh sorry token holders that show a long-term commitment. And that that's really powerful like like there there are teams in the industry that um source some of their best talent from their community because like you know you lock in for four years your tokens and you kind of like are stuck with that community and you know with with with enough skin in the game you care a lot and you know you you contribute you you surface talent.

It's it's it's a it's a powerful way of of making zillots. Um and then how do you how do you like actually make sure that um the value acrru to that token? So so people have like short commitment they've forgone liquidity. Well you know in traditional finance there is this concept of like productive assets and discounted cash flows and so so if you give token holders direct control over resource allocations and capital flows you turn the token into a productive asset. uh you also can give them you know control over protocol parameters and governance upgrades.

I'm going to get into that in a sec but I'm going to focus first on the resource allocation bit. Um so how how could that work? Okay so so we have you know the token locked here. Um token holders are committed for a certain time frame. Maybe they get a bonus if they commit for longer.

Um that network has a shared resource right? So it can be treasury allocation, it can be inflation. If you're fortunate enough to have like hit product market fit and you're like already creating value, you maybe are capturing some of it. It can be protocol fees. So you know a client we're working with, they're like, "Okay, well we're generating protoc protocol fees.

We want to make sure that you know value acrews to the token holders and also they are actively engaged into the decision- making of how do we use that shared resource, right? We we want to give them actual control. So because these people are like locked in quite literally uh they have an interest in the prosperity of and the longevity of the protocol. So they will have an incentive to do like better allocation decisions. Um it also such a system makes it easier for them to make uh allocation decisions because you have a defined decision surface.

Right? So you're saying like here are some examples of like okay we want to spend on growth we want to spare on corops we want to sell by the native token we want to do validator rewards we want to reward ve holders like just pay ourselves basically but the the important element here is you're you're defining like what we fund as a separate question than like how we fund it and who do we fund with it right because a lot of proposals if you're if you're involved in dows a lot of proposals like just fall through because like it's like oh like um you know this service provider is is is offering this and it's like a good thing but like a bunch of other service providers they actually want to take that contract and you end up with like you're either end up not funding something or overfunding it because like three teams that each one of them is getting money to fund the same thing. Um this is this is causing a lot of like deadlock situations. Um, another interesting element here is uh because you have a constraint set of alternatives, this sort of system makes a much better prompt if you want to use AI. I I'm not bearish on AI governance, but if you want to do that, this gives you a clean prompt because it's like I want to optimize for, you know, um, like like protocol daily users three years from now.

Here are the options of how I can spend resources today. Like, help me make the best decision. It's it's a it's a cleaner prompt than like should I fund this or not, right? Because like should I fund this or not doesn't tell you what the alternative paths are. Another benefit of like having a a constrainted set of alternatives is that this enforces fiscal discipline, right?

You know, like so the shared resources being reallocated every two weeks. That's like the standard. It something that curve started with and then like everybody is sort of like like building on like sticking to the same time frame. Also, like a lot of engineering sprints are two weeks, so it makes sense. Um, so I know that there's a 100% of protocol fees that I'm going to distribute every two weeks.

If I want to spend more on something, it means spending less on on something else. So you're not going to end in a situation where you've spent all your budget by July and then the rest of the year everybody's like, "What the do we do now? We have no money left." So this improves fiscal discipline. And then one of the one of the one of the like um okay it makes voting convenient because you can make it sticky.

So basically if I say like oh I I think we should invest in growth like at this stage of the protocol development investing in growth makes sense. I invest once my vote can stick there until I change my preference. So I don't have to go in and revote every two weeks. It just stays there. Um but one of the most important things for me personally is that this gives minority participants actual u voice and it creates value for them as well.

So if you think about it in a in a conventional proposal you have like yes no decision right if I have 3% of the network and somebody else has four if I want the proposal to pass I vote yes the person with the 4% votes no so basically they have 100% decision-making power I have zero right with a gauge system because you control proportionate share of the shared resource it means if I believe we should be spending on growth and I have 3% of the network even if everyone else votes for the other stuff 3% % of the resource is going to go there. So, so my minority participation still matters. Um, this has worked really well recently in like igniting growth flywheels. Uh, I think this is the uh drrome example. Um so basically you know you as you know like every protocol issues sort of uh rewards here to like reward some sort of behavior that brings so in this case you know depositing tokens into ILP positions to improve the liquidity on the on on the on the on the AMM.

This creates better UX, distracts users, they pay fees, uh you know, revenue gets redistributed and the element here that is important which is like how you kickstart. So the green thing is like the flywheel, right? Like the yellow part is how you sort of kickstart it. So you initially like reward some of the you reward LP with some tokens. The thing is because the token actually is a useful way to control shared resources, not all of it is going to hit the market, right?

Like we we've been through DeFi summer crazy APIs and then just like everybody's just like like selling the token as soon as it hits their wallet, right? Cuz because you can't do anything with it. It makes no sense to hold it, right? But because here the token actually has like real tangible ownership properties. This means that some of the rewards are going to get locked which as a protocol it decreases your cost, right?

Because because you you you you basically like float fewer like like less new tokens onto the market and you know like that sort of helps your your your your like market dynamics of the of the price of the token. Um so I do specifically we can see that like although that their uh emissions are going down over time volume on the exchange keeps growing. So they've successfully kickstarted the flywheel. um some of the other like use cases that I believe are like an important way of empowering both teams and token holders is to design better processes that for for like product development. So for example um this is an optimistic flow uh it's inspired by lido um but we kind of productized it and the idea here is so you know we had the the staking locking I mean okay let's go back for a sec so here right we have staking locking we spoke about resource allocation there's like protocol parameters for example so basically token holders they usually don't have enough context to actually proactively create proposals and suggest good implementations.

The thing is like most protocols where you're told like oh token holders can come in and anyone can come in and create a proposal there like 15 different multisigs that are security councils and whatnot and like that proposal ain't going through through unless it gets green lit by the core team or some like selected group of stakeholders. So we're like that's it's it's a it's a waste of collective attention, right? Because because like ultimately there is a selected group of people that have sufficient context to actually make good decisions and create good proposals and you know like those proposal goes through audits and blah blah blah blah blah to make sure that the system doesn't get attacked and that is usually members of the core team or close like how do they call consolation around them right um so what we've done is Okay. So, you take the you take the you take you take this like team multisig or like you know security council. They're the ones that are creating the proposals and then token holders hold the ultimate actual power.

So this is like hard power over what actually happens because there's a time lock and then if they disagree with a protocol upgrade they can just block that, right? So they don't need to come up with proposals but they still hold the ultimate power over the protocol. Um this empowers the core team to like be faster at shipping. Uh and you know it's it creates this like good balance between capture resistance and uh speed of execution. As we know in this space like things move very fast.

If you struggle to like align people around like oh we you know we wanna we want to upgrade our our our our protocol and then you know by the time you you gather like stakeholder alignment around like okay you know can we pass quorum um somebody else has forked the the code and is like like vampiring your TVL. Um so how does all of this come together to like build better systems and and projects and products? So we have token holders here. They they've they've they've shown commitment. They've locked their tokens for for a certain time frame.

Um and then by leveraging OSX, I have to say it. Uh so so our our our core protocol basically allows teams to have like very granular permission management and access control system which basically means that for every type of decision. So for every yellow box you can define in essence an arbitrarily complex decision path but you can isolate that. So instead of having like okay this is the proposal flow and like everything goes through this um you can basically say like oh for this sort of decision so so for example if you want to do a governance upgrade which is like how this whole thing works right so it's like okay token holders are the ones that can can create a proposal but you know sure they create a proposal but then there are two time locks there is like a security council which is like okay is this malicious uh are there is there stuff in the code that that shouldn't be there and maybe for some projects It's important you have like also some some legal rapper that can also exercise veto power to block this right. Uh let's be real like normuland and and meat space has impact on how we do things.

So like you can design this flow but this flow is pretty heavy like speed is not what you go here go for here. You here you want like this this sort of change to be slow right? So that's why you designed this process here you know for like you know upgrading pro uh the product or like changing protocol parameters maybe you want like a faster sort of path so you you design a different process where as I said like what I showed in detail before team multisync creates a proposal stakeholders can veto if they disagree with um this looks simple but um surprisingly like very few organizations have implemented such systems. Um like one of the most um striking examples is from a couple years ago, Cosmos had like at the same time they're they're running the entire like like the most important protocol upgrade for the IBC and a guy is asking for $5,000 to create YouTube videos and like like those two proposals go in parallel through the same flow. They're competing for the attention of the people that are making decisions simultaneously which makes no sense, right?

because like the implications of those two decisions are at at like drastically different scales. So so so the ability to actually like design granular specific paths depending on how impactful a decision is or like who like like which are the stakeholders that have uh so side note to make good decisions there are three things that are required. So you need to have incentive alignment, you need to have skill and you need to have context, right? So so very often you know it's sort of like oh you know like there are delegates in the in the system they they maybe have like context because they're like all the time in the forum thing is maybe there is a skill issue because they don't actually they're not developers they can't review the protocol or they have no skin in the game. Right?

Those three elements need to be there. And when you can design granular decision paths for each type of decision, you can think through like okay who should participate in this decision because they have incentive alignment, they have um do domain knowledge and they have sufficient context on the situation that that your product protocol is in. Uh that's it. Um, I mean ultimately the goal is to build something worth owning and hopefully with uh, you know, the ability to be more deliberate about how this organ how your product or protocol makes collective decisions uh, we'll help you get there. Thank you.

I have no idea how we're doing on time. I don't know if we have time for questions. Okay, cool. Yeah, let's go. I see you presenting venomics as something positive.

I agree that partially. But there is a counterargument of the incentive for bribing that comes with it. You see that as an issue or good bribing is good incentive alignment. Um, bribing happens in all walks of life always. So you can sort of like ignore it or you can recognize it and potentially leverage it, right?

So So it can be viewed as a bug or as a feature. I'd like to think of it as a feature because because we've seen this like we've been in forums we see that like like we we actually um there there's also like a very very interesting element which is like selfcensorship bribing. So a few years ago we built for for for nouns we were building like a a private voting implementation because they the thing the challenge that they faced is like bad decisions go through cuz people were afraid to speak up against them because it's sort of like if I if I block your decision if I block your proposal to get what know 400k to finger paint a noun on on a Brooklyn wall when I come in with my proposal you're going to block me, right? So, this like there is this tit for tat and it's like sure with vtokconomics maybe bribing is a bit more streamlined but like like at least everybody can participate. It's a more I would argue it's a more inclusive way of bribery, right?

Because because if you choose to to layer such a um such an element to your system, at least the rules are very clear. You know how much people are paying for it. you know who's being who's who's like auctioning their voting power for bribe so you know how much is available price rise instead of like you know going in a bunch of DMs and then like group chats and being like yo like we're friends right you're going to vote for me which is which is what happens in in every doubt that is um critical of bribes today or at least like maybe every is a bit of a harsh generalization but like in most organizations this is what happens Yeah. Uh my question about there is a popular take uh on Twitter that Dows would actually benefit more uh if they would way more privacy oriented. they don't need to be that transparent maybe you know to to different extent what's your take on this uh you know the tech is already there and there I I believe you you were working as Aragon with nouns and Aztec on something similar to it and Vitalik recently told that well this is maybe actually a good idea

yeah I think I think um part of so I think there are different stakeholders um I think um there is such an extreme push for transparency and what I call pseudo accountability because like posting something in a forum doesn't make you accountable uh because there is no actual value acrruel right like if I hold a token that is intrinsically worthless because there is no way for me to benefit from the growth of the system right like I'm very interested of like exactly how the money is being spent and who is taking like chips the table and like like people get obsessive about this right if I know like oh like there is this like very clear path of like this network grow it's successful my stake in the network is going to be appreciating because of like I think that would release a lot of the pressure and it's it's it's a lot of wasted effort to be honest because it's like oh the team is gonna like throw a bunch of data at chat GPT to create a report and then like the token holders are gonna throw the report into chat to get the key insights out because because there is this like almost like uh fetishization of like let's write the longest most elaborate report on like what we've done and it's not a problem only with Dows right like um if you if you're if you've ever gotten EU funding for anything you know that there is this dissemination of information which is from the things that you need to deliver and like a lot of the money actually goes into like telling people what you've done instead of like actually doing it which is colossal waste of human talent and and capital. Um so hopefully when when there is like more guarantees for the people that back an endeavor with capital whether that's like personal effort or financial resources. uh if if they have like more clarity on how the success of this endeavor will benefit them like the onus of like how much transparency should be available on fund spending and decision-m is going to go down and that would give teams more freedom to like move fast break things I mean ultimately it's like we are we are doing like we're building in public startups and like startups fail a lot they pivot a lot they do stupid stuff they pivot back to the original things and like all of that is out in the open, it creates tension because there is no value alignment. Okay, awesome. Thank you for the good questions and uh yeah, find us on socials.